Euro Edges Lower Despite Strong German Confidence Numbers

The Euro lost ground on Monday but seems to have held gain generated through the prior week. Yields are in favor of the greenback in the two year space but the differential of only 10 basis points is almost insignificant. The FOMC sees growth slowing in the first half of 2014 according to last week’s minutes, while sentiment in German continues to drive Europe’s largest economy.

The FOMC minutes were clear that the growth in the second half of 2013 was due in part to transitory factors. The minutes also revealed that there was talk about the possibility that the first interest rate hike might be needed sooner rather than later. The economic conditions the US is facing in the first month of 2014 would not warrant a higher Fed move as weather conditions have likely eroded any sustainable momentum. It will not be clear until the spring if the first quarter was a weather anomaly or a real slowdown.

In Europe, consumer inflation declined and could pose a threat to sustained economic growth. The Eurozone CPI dropped a record 1.1% month over month in January after rising 0.3% in December, with the fall much sharper than the 0.4% decline that was expected by economists. The index was dragged down by a tumble in the cost of non-energy industrial goods. Year over year, inflation was +0.8%, as in December. The sharp monthly fall in CPI comes amid concerns about deflation in the euro-zone, although the ECB has so far been sanguine about how this will affect growth.

Euro futures were unable to break through resistance levels near the recent highs at 1.3773. Support is seen near the 10-day moving average near 1.3694. The RSI (relative strength index0 moved lower and was also unable to push through to new highs, and is printing near 58, which is in the middle of the neutral range.

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